What These Overly Pessimistic Intel Stock Ratings Are Missing (Nasdaq: INTC)

Intel earnings update: Intel defied analysts' gloomy expectations with a strong beat on earnings. Earnings per share was $0.55, well above the forecast for $0.50 a share. Revenue was $13.83 billion, beating expectations for $13.04 billion. The company said that strong growth in its memory, Internet of Things, and data center businesses offset weakness in the PC business. INTC stock rose about 6% in after-hours trading Wednesday evening.


A wave of negative Intel stock ratings and price target reductions over the past couple of months has weighed heavily on Intel Corp. (Nasdaq: INTC) shares.

Intel stockAnd while the world's biggest chipmaker has hit a few bumps while it transitions from its historic dependence on the PC market to the growing mobile and data center markets, Wall Street has overreacted.

Depending on what the Santa Clara, Calif.-based company says when it reports earnings after the market close today (Wednesday), the Intel stock ratings could sink further.

Not every analyst that covers Intel hates it, but since the beginning of June there have been six price target reductions and three downgrades.

Two analysts, Goldman Sachs Group Inc. (NYSE: GS) and Asia-based brokerage CLSA, have a "Sell" label on their Intel stock ratings. Both have reiterated that "Sell" rating in the past two months, with Goldman doing so twice.

The consensus price target on INTC stock has dropped 10% since peaking in February at $37.17. The current Intel stock price target is $33.43.

The lowered Intel stock ratings are one reason why INTC shares are down more than 18% for 2015. Intel stock hit a 52-week low of $28.82 on July 9. Intel stock was trading at $29.65 on Wednesday afternoon.

So why are these analysts so down on Intel stock lately?

Why Intel Stock Ratings Have Gone South

The biggest reason is the continuing decline in PC sales. Intel has long dominated the processor market for personal computers. The company's PC business was still responsible for more than half of Intel's operating income in Q1 of 2015.

That was great in the 1990s when PC sales were booming, but not so much these days. Research firm Gartner reported earlier this month that PC shipments declined 9.5% in Q2 - the worst decline in two years.

Intel lowered its own guidance back in March, citing worsening PC sales.

Other chipmakers, such as Micron Technology Inc. (Nasdaq: MU) and Advanced Micro Devices Inc. (Nasdaq: AMD), lowered guidance in recent weeks, which analysts see as confirming a bleak trend.

Meanwhile, analysts aren't particularly optimistic about Intel's Data Center Group, which is providing the bulk of the company's growth now. Their concerns deepened with a weak demand warning last week from QLogic Corp. (Nasdaq: QLGC), which makes components for servers that use Intel chips.

All are legitimate concerns.

And yet it would be a mistake to write off Intel stock...

What the Negative INTC Stock Ratings Are Missing

There's no getting around the fact that the PC business is in decline. That's not going to change, but at the same time, the PC market isn't going to disappear.

According to Statista, the decline in PC sales will level off in 2016 and stay more or less flat after that.

That will stabilize revenue from Intel's PC business while its strategy to grow business in data centers and the Internet of Things starts to pay off and contribute more to the company's bottom line.

Even if Intel's data center business hits a few short-term snags, it's positioned for success in the long term. The planned $16.7 billion acquisition of Altera Corp. (Nasdaq: ALTR) brings a key technology under Intel's roof.

You see, Altera is a leader in Field Programmable Gate Array (FPGA) technology. FPGAs make chips customizable for specific tasks, making them faster and more energy efficient. Both attributes are priorities in data centers.

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Intel projects data center sales will grow 15% a year for the next four years. Profits will grow even faster as the data center business enjoys higher profit margins than Intel's other units.

The Internet of Things division so far hasn't had much impact (4% of Q1 revenue, 3.32% of Q1 profit) but that, too, holds tremendous potential for Intel over the next few years.

Intel has designed several ground-breaking products specifically for the embedded market, including the Quark "system-on-a-chip" and Edison, a Quark-based computer that fits on an SD card.

Research firm IDC forecast last month that the global Internet of Things market will grow from $655.8 billion to $1.7 trillion in 2020.

So yes, for now - and probably for the next few quarters - Intel's earnings won't do much to excite Wall Street. And Intel stock ratings will probably slip a little more before they bounce back.

But for patient investors, Intel stock is a great buy right now. It's unloved and faces stiff headwinds in the short term, but the company already has laid the foundation for success in the next phases of computing.

The Bottom Line: A steady drumbeat of negative Intel stock ratings has taken a toll on INTC shares, helping drive the price to a 52-week low recently. But while the company faces challenges in the near term, it has planned ahead. When PC sales level off and its growth strategy starts to pay off, the rising earnings will drive the stock price higher.

Follow me on Twitter @DavidGZeiler.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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